Five Reasons Why Stock Returns will Suck Going Forward. Welcome to the Trumpression.
April 4th
The economic and investment world has become obsessed with tariffs these days, as well they should be. President Trump declared April 2nd “Liberation Day” and promised to “Make America Wealthy Again.” The only people excited by this impeding catastrophe are hardcore MAGA types who expect high paying manufacturing jobs for America’s low skilled functional illiterates and the Canadian Federal Liberals poised to sweep the election despite having put Canada into an almost decade long recession. Investors are voting with their feet, or these days investment apps, and markets have plummeted.
There is little doubt that tariffs will have a serious negative effect on the economies of the industrialized nations. Arguably the two most devastating economic downturns over the last century and a half, the Panic of 1873 (a.k.a. the Long Depression) and the Great Depression of 1929 were so prolonged and destructive because of the consequences of tariffs. Although, the world economy is quite different, and larger now, we can expect some very negative consequences. In fact, the big surprise might be that we are headed into a downturn far more severe than serious analysts expect. Trump’s tariffs and the retaliatory actions of other nations are a massive tax increases on the consumer. Less affluent people will be hit far harder since much of their spending, as a percent of income, goes to necessities like food. People, in aggregate, will get poorer.
Tariffs may initially raise revenue for governments but the resulting economic weakness will result in less tax revenue. This is because unemployment will rise. Some estimates expect U.S. unemployment to rise from a bit over 4% to as high as 7% or even 8%. Unemployed workers do not pay income taxes and collect government benefits, increasing an already large deficit. Workers, who are still employed cut back on their spending since they fear for their own jobs. Effective spending will decline anyway due to imported goods soaring in price. This may precipitate a serious demand problem. John Maynard Keynes called this situation “the Paradox of Thrift”. It happens when during an economic downturn, people save more and spend less. Individuals save themselves but as a group cause the economy to decline even more. The modern version of this may involve credit cards and consumer debt. Typically, when times get tough, the default ratios of lenders increase and they cut back on the availability of credit. This results in strapped consumers not being able to access credit to fund current spending. The declining value of investors portfolios results in the reverse wealth effect as a declining net worth results in less spending. A real estate crash would make this even worse.
Time will tell and we will see how things will go. The future is unpredictable in the most stable of times and we are now in the Great Trumpian Chaos. By definition, we do not know what black swans and unforeseeable circumstances await us. Eventually, the world will adjust to the new tariff regime although things will be rough for a while, growth will be lower and most people will be poorer than they would have been without the tariffs. Eventually, Trump may bow to public and political pressure as Congress reclaims trade policy.
Tariff talk has absorbed all the oxygen in the room. Unfortunately, their are other factors that will affect the world economy negatively and there is no quick solution for these problems. As the result, we have probably seen the end of the secular bull market in equities that began in 1982. I base this belief on rational analysis and empirical evidence.
Economic growth is fading. When one examines the last few decades, it is clear that G.D.P. growth rates in the U.S. are slowing down. The annual G.D.P. growth rates of the 1970’s and 1980’s of 3% plus are gone. The 4% growth of the 1950’s and 1960’s are but memories. Since the Great Financial Crisis, 2% annual growth is considered a boom year. The population is aging which results in a less economically productive labor force. Low birth rates, especially among the more cognitively gifted, means less customers for companies and less profitability. Intelligence does correlate with income. That may be an unpleasant reality for virtue-signalers but it remains true.
An aging population means that retirees will be liquidating their stock, and to a lesser extent bond portfolios. Whereas Baby Boomers adding to their retirement plans during their younger years helped push the markets up, selling pressures will have the opposite effect. Also, older people spend less. Immigration will not help offset the population decline. Frankly, the cohort of immigrants industrialized nations are allowing in to their nations are not yielding the economic benefits of previous cohorts, as countries like Canada and the larger European countries have learned with disasterous results.
Despite the recent market selloff, equity valuations remain near all time highs. In the past, these metrics preceded many years of poor equity performance, especially if adjusted for inflation. Stock prices were only justifiable if earning growth remained high. Earnings estimates are being revised down by the week. Trump’s tariffs are earnings killers.
Deglobalization is here. Globalization lifted the world economy into an era of prosperity as billions of people left abject poverty. Deglobalization, if it continues, will have the opposite effect over the next couple of generations. Hopefully, leaders will regain their senses.
The U.S. is nearing a debt crisis. The dollar index has fallen about 6% since Trump’s inauguration day. There are proposals being floated out to call in U.S. bonds and issue new bonds at one-hundred year terms to maturity. This is a debt default by stealth. If a 5 year bond is issued and inflation in 2%. The $1,000 principal will be worth $904 in five years. In one hundred years, that $1,000 principal would be worth $133. This may sound insane but so is Trump’s tariff policy and we see how that’s going
We will discuss the debt situation in more detail in a subsequent issue. The implications are profound and will change the investor landscape for decades to come. The U.S. led financial regime is coming to an end. America will find that the U.S. dollar and Treasury market will lose favor.
Substantive as ever...